Customer Segmentation An Overview

August 16, 2010 by Nico Peruzzi 4 Comments

This information is useful for people who are interested in matching the best messages or products possible to those customers or prospects most likely to buy them. Why Segmentation? If you make a product, have a service, market or sell, customer segmentation is important to you. The days of one-sizefits-all approaches are long over, and especially in tough economic times, it is essential to be as efficient and effective as possible in getting the best version of your product or service in front of the people most likely to need it and buy it. How? There are many ways to break your customers into unique groups. Methods range from simple to complex to implement, and result in a variety of valuable information. All these methods should have the same goal how can your company better create need for your products or services by targeting the people most likely to buy them with appropriate messaging or offerings. Basic Demographic Splits As simple as it gets, cutting your customers by a single demographic variable is done all the time. Think, the pink one for the baby girls and the blue one for the baby boys. This method is very common in B2B situations where the cut is company size. How many companies do you know that base sales and marketing programs around small, medium and large business targets? This method is primarily useful because of its intuitive nature, and is so commonly used because it takes nothing more than a customer database or access to Dunn and Bradstreet data. Of course, this method has its limitations. Are all your small customers really the same? Do they all behave the same way and want the same things? Probably not. One common way to present these basic splits is in banner tables. A banner table highlights differences between segments on a number of other variables be they other fields from a database or variables from a survey. Lets Take it to Two Levels If a single split doesnt cut it (forgive the pun , how about first cutting by something like company size and then by, say, industry? Fine enough. Here, you start to isolate more and more unique groups, and by better understanding their uniqueness, you can better reach them with appropriate and effective marketing messages and provide them the product types and features they most need. And So On One could, in theory, continue to cut by more and more variables company size, then industry, then job function, etc. (or for B2C: gender, then age, then income, etc.). However, the human brain can only handle looking at so many segments at once, let alone find differences, so the output becomes unwieldy. To get this greater level of detail, we need to take the stats up a notch. Multivariate Lets start by making sure we all understand the meaning of this word: multivariate. Multi = many. Now, how about variate? Think variable. A variable is something that varies the opposite of a constant. So, multivariate = many variables. Thats it were looking at a number of variables, all at the same time. Cluster/Latent Class Analysis These analyses identify relatively homogeneous groups of cases (lets say customers) based on selected characteristics (these are the variables). If you can imagine multidimensional space, you can wrap your head around these analyses.

Imagine a star in space. Now imagine a cluster of stars Im not an astronomer, so work with me here

You can look

in the sky and see one group of stars that clump together over in one part of the sky, and another group that clump together in a different part of the sky. These analyses basically put your customers into homogeneous groups based on how close the customers are to each other. Close, in this case, takes into account how a customer looks on a number of variables (remember, multivariate). You end of with a group of customers that are like each other and are different than another group (cluster). Now you can see why we can only go so far with crosstabs we just cant capture the multivariate space without some better analytics. Note that there are other analytic methods that can be used to segment customers (e.g., CHAID), however, for the purposes of this post, lets focus on clustering methods. Exploring Segmentation Solutions These analyses are what we call exploratory techniques in other words, to paraphrase Forrest Gump, its like a box of chocolates you never know what youre going to get. Heres where the science and art of statistics merge (yes, dont laugh, statistics can be artful). Between many and one cluster lies a potentially useful number of clusters where similarities exist within the clusters and differences exist between clusters. A quick note, beyond the scope of this post, that ensembling techniques (in essence, looking at multiple cluster solutions together to find one that is more stable) can help you come to a better solution. Also, heres where you put on your business hat (or call in the business people if you dont own that hat) to figure out how actionable the segmentation solution is. What Makes a Good Segmentation? I once had a client who felt that his market should have 10 or more segments without looking at the data. I brought him 4 and 5 segment solutions based on the data. Who was correct? Here are a few things to keep in mind when choosing a final segmentation solution: 1. 2. 3. 4. 5. Distinct and Identifiable: Groups have to be different than each other on variables that you can measure now and in the future. Sizable: Groups have to be large enough that they are worth marketing/selling to Reachable: Groups can be identified in the market and targeted (note: this is a big issue that is often not achieved see below) Stable: Groups need to look tomorrow like they look today (note: customers change over time, and segmentation solutions do get stale when that happens, its time to run a new study) Profitable/Valuable: Groups that are reached act on the messages/products that they receive by purchasing (note: not all groups will fit into this category you will identify some groups that will likely not buy thats good to know, so you dont reach out to them.) 6. Relevant: Groups are integrated with your larger marketing plan and make sense in the context of your strategic direction. Criticisms of Segmentation I got these great-sounding segment names, but they dont have distinct demographic targeting profiles, so I cant reach them. Making up cool names based on attitudinal and/or behavioral clustering can be a lot of fun, but if your segments arent unique on the variables you use to target them, then that doesnt help. Note that this is more of a methodological issue than anything else (see below). My segmentation report just sits on the shelf. Sad story all too common. Sometimes, this outcome cant be helped. Ive seen VPs torpedo a good-looking segmentation solution because it didnt match their preconceived notions. To give yourself the best chance of a solution being used in your organization, make sure you have clear objectives and buy-in from key stakeholders, and involve key people over the life of the project. But Wait, Theres More One of the most exciting developments Ive seen in segmentation is a technique called Reverse Segmentation. Its important enough that it deserves its own post, so stay tuned. For the moment, Ill say that it provides a solution for criticism #1 above.

Market segmentation
From Wikipedia, the free encyclopedia

The lead section of this article may need to be rewritten. Please discuss this issue on the talk page and read the layout guide to make sure the section will be inclusive of all essential details. (August 2012) This article needs additional citations for verification . Please help improve this article byadding citations to reliable sources. Unsourced material may be challenged and removed.(December 2012)

Market segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs, and then designing and implementing strategies to target their needs and desires using media channels and other touch-points that best allow to reach them. Market segments allow companies to create product differentiation strategies to target them.

Contents
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1 2

Criteria for segmenting Basis for segmenting consumer

markets
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2.1

Geographic

segmentation
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2.2

Psychographic

segmentation
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2.3

Behavioral

segmentation
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3 2.4 2.5

Occasions Benefits

Using segmentation in customer

retention
4 5 6 7

Price discrimination Algorithms and approaches See also References External links

Criteria for segmenting [edit]

An ideal market segment meets all of the following criteria:

It is possible to measure. It must be large enough to earn profit. It must be stable enough that it does not vanish after some time. It is possible to reach potential customers via the organization's promotion and distribution channel. It is internally homogeneous (potential customers in the same segment prefer the same product qualities).

It is externally heterogeneous, that is, potential customers from different segments have different quality preferences.

It responds consistently to a given market stimulus. It can be reached by market intervention in a cost-effective manner. It is useful in deciding on the marketing mix.

Basis for segmenting consumer markets [edit]

Geographic segmentation [edit]
The market is segmented according to geographic criterianations, states, regions, countries, cities, neighborhoods, or zip codes. Geo-cluster approach combines demographic data with geographic data to create a more accurate profile of specific [1] With respect to region, in rainy regions you can sell things like raincoats, umbrellas and gumboots. In hot regions you can sell summer wear. In cold regions you can sell warm clothes. A small business commodity store may target only customers from the local neighborhood, while a larger department store can target it's marketing towards several neighborhoods in a larger city or area.

Psychographic segmentation [edit]

Psychographics is the science of using psychology and demographics to better understand consumers. Psychographic segmentation: consumers are divided according to their lifestyle, personality, values and social class. Consumers within the same demographic group can exhibit very different psychographic profiles.

Behavioral segmentation [edit]

In behavioral segmentation, consumers are divided into groups according to their knowledge of, attitude towards, use of or response to a product.

Occasions [edit]
Segmentation according to occasions is based on the arising of special need and desires in consumers at various occasions. For example, for products that will be used in relation with a certain holiday. Products such as Christmas decorations or Diwali lamps are marketed almost exclusively in the time leading up to the related event, and will not generally be available all year round. Another type of occasional market segments are people preparing for their wedding or a funeral, occasions that only occurs a few times in a persons lifetime but happens so often in a large population that it can be considered a market segment.

Benefits [edit]
Segmentation takes place according to benefits sought by the consumer or which the product/service can provide.

Using segmentation in customer retention [edit]

The basic approach to retention-based segmentation is that a company tags each of its active customers with three values:

Is this customer at high risk of canceling the company's service? One of the most common indicators of high-risk customers is a drop off in usage of the company's service. For example, in the credit card industry this could be signaled through a customer's decline in spending on his or her card. Is this customer worth retaining? This determination boils down to whether the post-retention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer.[2][3] What retention tactics should be used to retain this customer? For customers who are deemed worthy of saving, it is essential for the company to know which save tactics are most likely to be successful. Tactics commonly used range from providing special customer discounts to sending customers communications that reinforce the value proposition of the given service.

Price discrimination [edit]

Main article: Price discrimination Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the quantity sold less, generating monopoly profits for the seller. These profits can be increased further if the market can be segmented with different prices charged to different segments charging higher prices to those segments willing and able to pay more and charging less to those whose demand is price elastic. The price discriminator might need to create rate fences that will prevent members of a higher price segment from purchasing at the prices available to members of a lower price segment. This behavior is rational on the part of the monopolist, but is often seen by competition authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned. Areas in which this price discrimination is seen range from transportation to pharmaceuticals. [citation needed]

Algorithms and approaches [edit]

Any existing discrete variable is a segmentation - this is called "a priori" segmentation, as opposed to "post-hoc" segmentation resulting from a research project commissioned to collect data on many customer attributes. Customers can be segmented by gender ('Male' or 'Female') or attitudes ('progressive' or 'conservative'), but also by discretized numeric variables, such as by age ("<30" or ">=30") or income ("The 99% (AGI<US $300,000)" vs "The 1% (AGI >= US $300,000)"). Common statistical techniques for segmentation analysis include:

Clustering algorithms such as K-means or other Cluster analysis Statistical mixture models such as Latent Class Analysis Ensemble approaches such as Random Forests

See also [edit]

Demographic profile Mass marketing Niche market Precision marketing Psychographic Target market Industrial market segmentation

References [edit]
1. ^ 'What is geographic segmentation' Kotler, Philip, and Kevin Lane Keller. Marketing Management. Prentice Hall, 2006. ISBN 978-0-13-145757-7 2. ^ Gupta, Sunil. Lehmann, Donald R. Managing Customers as Investments: The Strategic Value of Customers in the Long Run, pages 70-77 (Customer Retention section). Upper Saddle River, NJ: Pearson Education/Wharton School Publishing, 2005. ISBN 0-13-142895-0 3. ^ Goldstein, Doug. What is Customer Segmentation? MindofMarketing.net, May 2007. New York, NY.